Paddy's "Letter from London"

Tuesday, October 12, 2010

Other models for Tertiary education

With University funding headline news let me tell you how I got my degree. In the mid-1960s I was recruited by Shell-Mex and BP, the UK marketing arm of Shell and BP, straight from school with a couple of moderate A levels (Two A levels was much more the norm in those days). After a couple of years of learning a bit about the business I was selected along with a handful of others to do a BA Hons degree course at Ealing Technical College (now Thames Valley University). The standard was academically quite high and it was a genuine Honours Degree in Business Studies guaranteed and monitored by the Council for National Academic Awards. I graduated in 1970 with a 2.1.

The incidence of corporations/private sector employers offering young employees the chance to do vocational tertiary education is I suspect low these days. But why not? On a “Sandwich Course” you learn about the business of your employer as well as doing proper vocational education. And when you graduate you go into a job with already an inbuilt loyalty to your employer. I stayed with Shell for the rest of my 37 year career.

There are other funding models for Tertiary education and other ways of getting there than traditional University courses. My Business Studies degree was almost entirely relevant to my subsequent business life. It cost me nothing and Shell got me – for better or worse!

Why doesn’t the Government encourage Private Sector employers to offer appropriate vocational Tertiary education to school leavers in return for these students’ commitment to that employer? Tax incentives could apply so that the net cost to both the employer and the taxpayer were kept low. Everyone would benefit.

Thursday, October 07, 2010

The Tea Party phenomenon - a view from inside the Beltway

My friend Sam is a Brit who has lived in the United States for thirty years – for the last decade or so in Washington DC. He knows his way around and is a shrewd observer of the US Political scene. I asked him about the Tea Party. Here is his response:

Sir Christopher Meyer is on his way shortly to America to investigate the Tea Party. I read his Tweets and as much as I admire him from his time here - very funny, very able - I fear he will not find the answer to the Tea Party in the salons of Georgetown. He needs to go to pretty much any city or town outside of DC to stand a chance - and I hope he plans to do that. Here my view of the Tea Party:

Who are they?

Predominately Independents, some Republicans and even a few Democrats. A sobering fact - a poll last week showed more people identifying themselves with the Tea Party than either Republican or Democrat

Why have they emerged?

They have certainly emerged from the bottom and in that respect scare both Republican and Democrat elites). Frustration and disgust with the dysfunctionality, corruption and incompetence of the Senate and the House. Surprisingly Obama himself holds up quite well. And fear of excessive deficits and exponentially expanding debt - and what that means for the middle class and for their children in terms of living standards etc. Probably also fear of losing the US's preeminent position in the world to China.

What do they stand for?

A difficult one to answer - it's a sort of value system - individual vs. big government and a desire to rebalance the public and private sector. Government may be an enabler and supporter but should not intrude into every aspect of one's life. It's not that different from what Cameron/Clegg are saying - if I understand them correctly - essentially changing the mindset of the average Briton from turning to Government to ask what are they going to do about it - to saying what can I do about it. Now the Americans are nowhere near as far down that road as the UK but the tea partiers think they are moving in that direction.

If I may paraphrase Tony Blair "The only way we progressives win is by being the party of empowerment, and that requires a state that is more minimalist and strategic, that is about enabling people, about developing their potential but not constraining their ambition, their innovation, their creativity."

The politician - Republican or Democrat - who convinces the voter that he/she stands for the above will prevail in the mid-term elections. I would also add - stop the spending.

Could a similar movement develop in Europe? - unlikely. The only way I see it happening is if there is a sense that the EU has become less and less responsive to the wishes of the people, the economy stagnates, the debt piles up and standards of living stagnate or fall. And that is not totally inconceivable.

I think what the Tea Party would support - at least in concept - are the Cameron/Clegg spending cuts. It will be very interesting to see the reaction when the details are fleshed out later this month.

Wednesday, October 06, 2010

Watch the Coaliton's smash and grab raid on your pension

The National Association of Pension Funds (NAPF) annual conference in Liverpool won’t have grabbed too many headlines clashing as it does with the Conservative Party conference. But the subject of Pensions is sufficiently important for the Coalition to arrange for their Pensions Minister, Steve Webb, a LibDem, to address the conference and to answer questions. A number of the delegates wanted to quiz Mr. Webb on the detail of his plans to replace the Retail price Index (RPI) as the indexation reference for annual Pension increment calculations, by the Consumer Price Index (CPI). Webb’s position has been summarised as “CPI is the most appropriate measure of inflation for state benefits, and it is appropriate to take a consistent approach for private pensions” and he confirmed at the conference that this is the case.

So the coalition government intends to use CPI for the uprating of state pensions, state benefits and also for the inflation-related increases built into the big public sector pension schemes. As the government tries to cut the record peacetime deficit the changes will lead to a huge saving in the state's pension costs. The CPI measure of inflation has generally risen by 0.7% a year less than RPI and in the next five years the gap between the two is likely to be at 1.2% a year, according to data from the recently established Office for Budget Responsibility.

The logic of saying that CPI should also apply to Private Sector pension schemes as well is a reasonable one - however quite what this will mean in practice is unclear. Many Defined Benefit schemes have written into their Trust deeds that RPI should be used as the minimum increase for pensions each year. "Pensions linked to CPI will be lower over a period of time - some estimates put the drop as high as 25%", said Dawid Konotey-Ahulu of Mallowstreet who was present at the Conference and who questioned Mr. Webb on the plans.

The Government has basically two options in respect of their plans for private sector pensions. Firstly they could pass legislation which will require Pensions Funds to amend their Trust Deeds and replace RPI with CPI. The logic for doing this, aside from the elegance of have only one index used for all pension increment calculations, is that the burden on businesses would be significantly reduced. It would particularly help those Fund sponsors who are faced with the need to fund rescue plans for underfunded schemes – British Airways and BT are two of the very big names who would benefit from this move. The second option is that Government could refrain from legislating to compel funds to replace RPI with CPI but they could actively encourage such a move – perhaps with some tax incentives. Many businesses would jump at the chance to reduce their funds’ liabilities and the policy could be sold as business friendly.

The missing link in all of this is the consultation which many in the industry believe to be essential. This consultation would have to take into account the views of Pensioners and their representatives – which is perhaps why the Government is reluctant to do it. For, as Mr. Konotey-Ahulu pointed out to the Minister, the consequences for individual pensioners of a change from RPI to CPI are very significant indeed over time. It is also the case that RPI has never been a very good measure of Pensioner inflation anyway – not, of course, because it exaggerates this inflation but because it underestimates it! The Office for National Statistics compiles a separate measure of pensioner inflation, though this is not used to set any pensions or benefits. This data shows that pensioner inflation in the second quarter of 2009, for example, was 4.3%, whereas the basic RPI was 2.2% - and this was not an exceptional quarter. Organisations like Age Concern have constantly pointed to the fact that RPI underestimates Pensioners true cost of living increases. A move to CPI will make the gap even greater and can only lead to hardship for many pensioners.